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Toll Brothers (NYSE:TOL)
Q2 2018 Earnings Conference Call
May. 22, 2018 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Toll Brothers second-quarter 2018 earnings conference call. All participants will be in listen-only mode. [Operator instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator instructions]. Please also note this event is being recorded.I'd like to turn the conference call over to Doug Yearley, CEO. Please go ahead, sir.

Douglas C. Yearley Jr. -- Chief Executive Officer

Thank you, Laura. Welcome and thank you for joining us. I'm Doug Yearley, CEO. With me today are Bob Toll, executive chairman; Rick Hartman, president and COO; Marty Connor, chief financial officer; Fred Cooper, senior VP of finance and investor relations; Kira Sterling, chief marketing officer; Mike Snyder, chief planning officer; Gregg Ziegler, senior VP and treasurer; and Don Salmon, president of TBI Mortgage Company.

Before I begin, I ask you to read the statement on forward-looking information in today's release and on our website. I caution you that many statements on this call are forward-looking based on assumptions about the economy, world events, housing and financial markets, and many other factors beyond our control that could significantly affect future results. Those listening on the web can email questions to rtoll@tollbrothers.com.We completed the fiscal year 2018's second quarter on April 30. Our double-digit dollar growth in revenues, contract, and backlog reflect the health of the luxury new-home market.

We had another solid spring selling season. The value of second-quarter signed contracts, the highest quarter in our history, rose 18% in dollars on a 6% increase in units. On a same-store basis, signed contracts of 9.04 per community were up 16% from last year and the highest for a second quarter since 2005. This was our eighth consecutive quarter of year-over-year same-store contract growth.

Based on our second-quarter results and feedback from our sales teams around the country, it does not appear that the rise in mortgage rates has had a negative impact on our business. The 30-year fixed-rate mortgage is still only at 4.87%, which is up about 75 basis points in the past year. We have also not seen any impact from SALT. The changes to the state and local tax deduction on our sales, California where SALT would be felt the most was particularly strong this quarter.

For example, in Northern California, Metro Crossing and Fremont has sold 136 homes since opening 3 1/2 months ago at an average price of $1.2 million. In Southern California, Altair, located in Irvine, has sold 78 homes since February at an average price of $2.5 million. I also want to highlight some other markets where we have seen strong sales. In Boise, a market that may be perceived as more interest rate sensitive, we continue to sell very well.

For the second quarter, we took 14.5 contracts per community and ended the quarter with 354 homes in backlog. Our acquisition of Coleman Homes there continues to exceed our expectations. Active adult continues to sell well in both the Western markets such as Reno and Las Vegas and in the East. For example, out West at Regency, at the Monte Ranch in Reno, we have sold 35 units in February.

And in the East at Regency at Kimberton Glen located outside of Philadelphia, we have taken 36 agreements also since February. At Coastal Oaks, which is a master plan community in Jacksonville, Florida, we have sold 42 homes since February. I am proud of our performance this quarter considering our reduced community counts and the difficult comp the last spring. In 2017, our second-quarter contracts were up 23% in dollars and 26% in units from the prior year, and we had 12% more communities last year than this year.

Nonetheless, as I mentioned this quarter, we had the highest dollar value of contracts for any quarter in our company's history. We project third-quarter-end community count to be approximately 290, down from 312 at last year's third-quarter end but up from 283 at 2018 second-quarter end. With 75 planned new community opening in the back half of the fiscal year 2018, we project to end fiscal '18 with approximately 315 communities, compared to 305 at fiscal year-end 2017. And without giving specific guidance on community count for the fiscal year 2019, we already own or control enough communities we plan to open next fiscal year to project in community count and that is before potential new land acquisitions in the pipeline.

Turning to revenues, we saw 17% rise this quarter with increases in every region. California revenues rose 17% and were our largest region producing 27% of total revenues. The North was up 19%, the mid-Atlantic was up 13%, the South was up 23%, so West was up 15% and City Living was up 17%. California and the Western region combined produced nearly 50% of total revenues, reflecting the strategic diversification of the company's operations over the past decade.

With our $6.36-billion backlog, we believe the fiscal year 2018 will be a year of significant revenue growth. Based on this backlog, a projected increase in community counts, the quality of our brand and land portfolio, the financial strength of the affluent home buyer, and the breadth of demographic segments we serve, we believe the fiscal year 2019 will be another year of growth as well. Now, let me turn it over to Marty.

Martin P. Connor -- Chief Financial Officer

Thanks, Doug. Before I address the specifics of this quarter, I do want to note that a reconciliation of the non-GAAP measures referenced during today's discussion to their comparable GAAP measures can be found in the back of today's release. We are pleased with our second-quarter results. We exceeded the midpoint of our guidance for revenues, units delivered, and average delivered price and we exceeded our specific guidance for SG&A, JV and other income and our tax rate.

Adjusted gross margin came in a bit lower than the guidance for three main reasons. First, we had some delayed high-margin California closings, which we expect to shift into the third quarter. Second, we saw the impact of labor and material cost pressures, and the third reason was attributable to our strategy of reducing standing inventory in some of our finished condo projects in New York City. Related to that, we have made meaningful progress in our previously announced initiative to sell out the remaining inventory in some of our completed condo buildings in New York City.

To date, we have sold approximately 48% of the units and 43% of the dollar value of the wholly owned inventory we began this fiscal year with. This is a returns-focused initiative that has some short-term impact on margins but will generate significant cash that we can reinvest in better opportunities. For the full year, we reaffirm our adjusted gross margin guidance at 23.75% to 24.25% of revenues but acknowledge the challenges associated with labor and material cost inflation. On the other hand, California, which is a higher margin business, is becoming a larger percentage of deliveries.

In Q2, it was 27% of revenues. We expect that to grow steadily through the balance of the year to the mid to low 30% of revenue. It's also important to note that all product types and all regions are projected to show margin improvement in Q3 and Q4. Consistent with our focus on return on equity and driving shareholder value over the last few years we have been reducing the number of years of land we own on balance sheet.

It is now below four years based on the midpoint of fiscal year 2018s projected deliveries. We will continue to focus on increasing the percentage of land we control through options in order to improve our return on equity. Also related to return on equity to date, we have repurchased $291 million worth of our stock since the beginning of the fiscal year and reiterate our soft target of $400 million for the full year. Finally, in April we increased our quarterly dividend from $0.08 to $0.11 per share.

This returns the dividend yield to approximately 1% of our share price. Our apartment business continues to grow. We now control a pipeline of approximately 16,000 units in projects completed, in construction, under development or in approvals. We're expanding this operation beyond our Metro Boston to Washington, D.C., base, and now have teams in San Fran, Los Angeles, Atlanta, Dallas, and Phoenix,Earning the guidance for the third quarter and the balance of the fiscal year and subject to our normal forward-looking statement caveats, we offer the following guidance.

We are increasing the midpoint of our full-year delivery guidance by 50 units and $5,000 in average delivered price. That is approximately an $80 million increase to the midpoint of our revenue guidance for the full fiscal year 2018. We now expect full-year deliveries to be between 8,085 units at an average price between $830,000 and $860,000. For the third quarter, we expect deliveries between 2,100 and 2,200 units at an average price of between $830,000 and $850,000.

We reaffirm our adjusted gross margin guidance for the full fiscal year of 23.75% to 24.25% of revenues with the third quarter estimated to be around 23.4%. We reaffirm our fiscal year SG&A guidance of 10% of revenues with a rate of 9.6% expected in the third quarter. We revised the range for our fiscal year JV and other income guidance down slightly to $130 million to $160 million and expect approximately $20 million of this to be in the third quarter. Our effective tax rate guidance is reaffirmed at 23% to 25% for the year and our expectation for the third quarter is 27.5% of pre-tax income.

As Doug noted, we project a slight increase in third-quarter-end community count compared to second-quarter end, but our projected third-quarter-end community count is down about 7% from a year earlier. We project a fiscal year-end 2018 community count of approximately 315, compared to 305 a year earlier. Now let me turn it over to Bob.

Robert I. Toll -- Executive Chairman

Thanks, Marty. Jobs are plentiful. Unemployment is low, wages are rising, and existing home price appreciation is providing the equity for customers to buy new homes. Homeownership and household-formation rates are increasing while supply remains very constrained. With our solid land positions and the capital to expand, we're gaining market share and look forward to continued growth. Now over to Doug.

Douglas C. Yearley Jr. -- Chief Executive Officer

Thank you, Bob. Thank you, Marty. Laura, we're ready for questions.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator instructions]. Our first question today will come from John Lovallo of Bank of America Merrill Lynch

John Lovallo -- Bank of America Merrill Lynch -- Analyst

Hey guys, thank you for taking my question. The first is the third-quarter gross margin, adjusted gross margin, target of 23.4%. It would imply doubt about 160 basis points year over year despite some benefit from those delayed California closings that you mentioned. What are the kind of the big drivers of that outside of maybe labor?

Martin P. Connor -- Chief Financial Officer

I think the biggest driver is just a function of mix, John, but as we've mentioned Q3 and Q4 of '18 are going to be improved over Q2 here. So things are going in the right direction.

John Lovallo -- Bank of America Merrill Lynch -- Analyst

OK. And then maybe just on the labor comments that you guys made, it seems like you do utilize a slightly different labor base than most of the other public home builders. And your competition is more kind of the local guys. I mean, what is driving in your view kind of the increases in labor as it just a lack of availability of workers or you know, what's going on there?

Douglas C. Yearley Jr. -- Chief Executive Officer

John, first, I don't think we use a different trade base than the other builders, with the exception of maybe some finish trades that are a little more custom and capable of finishing our homes to the higher standard that we demand and our client demands, but we're all as an industry in this together and, as we've all talked about, labor is tight. It's a combination of, I'd say, probably 20% or 30% labor and the balance right now is materials, No. 1 of which, of course, is lumber is up significantly, but it's really across the board with the labor force and then, as I mentioned, a couple of different pretty significant materials, primarily lumber that go into the home. But we're all in this together.

I really don't think there's a difference for Toll Brothers versus the other builders.

John Lovallo -- Bank of America Merrill Lynch -- Analyst

OK. Thank you, guys.

Douglas C. Yearley Jr. -- Chief Executive Officer

You're welcome.

Operator

The next question will come from Dan Oppenheim of UBS.

Dan Oppenheim -- UBS -- Analyst

Thanks very much. Just wanted to ask you about that, in terms of the California delays, you talked about the percentage of revenue getting into the 30s later in the year. And just it seems though that might mean that the delays persist a little bit longer. I guess trying to just get a little bit more color on that in terms of how you're thinking about backlog conversion for the third quarter and so the overall mix there?

Douglas C. Yearley Jr. -- Chief Executive Officer

Yeah. Dan, I don't think the delays we're seeing are anything out of the ordinary. It's the typical, there've been some construction delays due to some labor issues. We have some buyers that request the delay.

Our houses are big and very complicated and as you know in California, our price point is higher, which means the houses are bigger and have more options. It's something we're managing. It's something we're very focused on. And I'm confident that the situation will improve, but it's nothing that causes me great alarm.

We've all been doing this a long time and we can bucket these delays into the normal categories, some of which I just mentioned. And we're going to do our best to manage it, but I would not be alarmed that this problem is going to increase or continue to the extent we just saw.

Martin P. Connor -- Chief Financial Officer

And just on the rough order of magnitude, Dan, we're talking 15 homes and they have that much of an impact on our margin because of the price point of those homes and the fact that their margin is 5% to 7% higher than our average. Right.

Dan Oppenheim -- UBS -- Analyst

Right. And I guess but, so for backlog conversion for the second half of the year, should we expect that to be similar to what it was and then the second half of '17 or continue to have a lower level relative to '17 as it was in the second quarter?

Martin P. Connor -- Chief Financial Officer

I think in the guidance we've outlined, we've taken into consideration the volume of business in California and the situation we just encountered here in the second quarter. So I think you're looking at a backlog conversion of 30% for the next quarter.

Dan Oppenheim -- UBS -- Analyst

OK. Thanks very much.

Operator

The next question comes from Dennis McGill of Zelman and Associates.

Dennis McGill -- Zelman & Associates -- Analyst

Hi, good morning guys. The first question on the gross margin comments Marty you had, can you maybe a segment, the three items you mentioned as far as the order of magnitude which was more impactful? And then related to that with the discounting that you're doing in New York City to clear the inventory, the fact that you're holding guidance for the full year, does that mean you're making up for that somewhere else or that you're sliding just to the lower end of that versus what you might've thought before?

Martin P. Connor -- Chief Financial Officer

I think, our success in California is offsetting our success in New York City with respect to that strategy. So, I think from that perspective you could say we're making up for it. As it relates to the three components, they were second-quarter issues and they have equally weighted around 10 to 15 points each, California delays in New York City success in inventory, clearance, and cost creep from labor and materials.

Dennis McGill -- Zelman & Associates -- Analyst

OK, great. And then second question, with the success that you're guiding to with respect to getting more communities open, and the strong absorptions you're seeing today, would you anticipate that there's any trade-off between absorptions and community count as you go forward or either from mix or from how you're going to price the product?

Martin P. Connor -- Chief Financial Officer

No.

Dennis McGill -- Zelman & Associates -- Analyst

All right, appreciate it guys. Thanks.

Operator

Next, we have a question from Paul Rubelzki of Wells Fargo.

Stephen East -- Wells Fargo Securities -- Analyst

Actually, this is Stephen. Hey guys, quick question. The gross margin broke below 20% this quarter, I know that's temporary but long term it's come down. So I guess a couple different things, one short term and one long term.

Your guidance for 4Q implies you're going to be meaningfully up and up year over year. Is that the inflection point when we're looking short term as far as year-over-year comparisons? And then, Doug, as you look at longer term, it's down from where you all have historically been. You've got a lot of product mix and geography mix that's changed. You're pushing your land to more options, etc., but I guess if you could just help us out how you all think about the business today versus maybe you thought about it, 10, 15, 20 years ago from a gross margin perspective?

Douglas C. Yearley Jr. -- Chief Executive Officer

Stephen, I guess I'm a little confused by your reference to an inflection point in the fourth quarter. That will obviously be the high point of our margin for this year as it benefits from California becoming an increasingly large percentage of our total deliveries. I'm one margin for '19 yet.

Stephen East -- Wells Fargo Securities -- Analyst

Yeah, I'm sorry. I was just talking about on a year-over-year basis, Marty, where the first three quarters are down and it looks like, as you go through the numbers, potentially ignor -- including capitalized interest, that it looks like maybe fourth quarter will be up. So just wondered if that was if you sort of anniversaried all the decline in the gross margin?

Martin P. Connor -- Chief Financial Officer

I think that's certainly the case for the fourth quarter and we'll give a '19 margin guidance at a later date.

Stephen East -- Wells Fargo Securities -- Analyst

OK. Fair enough.

Douglas C. Yearley Jr. -- Chief Executive Officer

And, Stephen, with respect to your broader question about whether we look at the business differently today with respect to gross margin and ROE and other metrics compared to 10 or 15 years ago. The answer is no. We are very proud of our margins. They are among the highest in the industry.

We have also, as you know, worked very hard in the last couple of years to improve ROE and I'm very proud of the results that are paying off on the ROE. I think you'll continue to see that improve as we continue to do the things Marty mentioned, which is option more land, be more creative and land buying, move opportunities off-balance sheet where appropriate, buyback stock issue dividends. and you know, we're, we're very focused on enhancing shareholder value through improving the ROE but we're, most, we're most focused on driving earnings and we will continue to work hard to buy the best land we raised the price when we can. California right now has significant pricing power but we are also sensitive to making sure that we move through, the land that we have.

And that, of course, is an ROE focused. So for us, it's a balance. It is no different from what we did in prior cycles. Obviously, in prior recoveries, there was more pricing power.

So ROEs were naturally improving because those with the land we're rewarded and this recovery have been a different, a bit different where there has not been as much pricing power. And so, we have focused more and more on other levers that we must pull to improve the ROE but you will continue to see us balance margin with ROE.

Stephen East -- Wells Fargo Securities -- Analyst

Got you. And that's really helpful. Thanks, Doug. And then on multifamily, you all have a really started to or you've been accelerating that business if you will.

I guess, can you just give us a little more of view about what's happening? What's going on there? To me, as we look at markets, we see, you know, a lot of inventory in the central business district with towers, etc., but we don't see much inventory at all as you start to move away from that and more, mid rise, low rise, that type of thing. So just trying to understand how you all are looking at that business and what you expect going forward from it?

Douglas C. Yearley Jr. -- Chief Executive Officer

Stephen, we're very excited by our apartment business as we, as we started today, we have over 16,000 units in various stages of entitlement development or lease-up or stabilization. We have expanded the business beyond our core market of Washington DC to Boston. We now have teams in major cities around the country. It is a blend of a suburban garden, apartment, infill midrise and city high rise, and that applies not just to the east but in the newer markets that we've mentioned that we've entered.

Our team is performing very well. We have a strategy of doing all of this off-balance sheet. It has a very high return on investment, return on equity, and we have a strategy generally for every three we build and stabilize. We will sell one and hold two, so we will return earnings to our shareholders regularly.

And as that business grows, obviously there are more threes, so there's more one that we sell a but will we also be building a long-term portfolio. And we think that's a good balance and we're really excited about where the business is headed. And I think you're going to see a terrific growth and strong earnings coming out of it.

Stephen East -- Wells Fargo Securities -- Analyst

Doug, can I ask you quickly on that, where you're at 16,000 now as you look out, you know, maybe over the three years or something like that, what would you all be comfortable taking this business?

Douglas C. Yearley Jr. -- Chief Executive Officer

It's in the early stages right now, it's only for us about four or five years old. So I would be very comfortable with this business doubling. I think there are plenty of opportunities in the markets. We're now in plus many more markets that we haven't even begun to enter or even begun to look at.

This year alone we have Gregg, how many, how many properties that will be under construction this year? Hold on? We have 2100 plus units that will be in construction this year. Average size is 300 to 350, so call that eight or nine new properties this year alone that are going up.

Martin P. Connor -- Chief Financial Officer

And remember Stephen, this business has a tendency to recycle capital so that you can build the next building with money from the last building through the refinancing or sell-down process. So our capital investment in this is approximately a $0.25 billion right now, maybe $300 million. And that's with the maybe a dozen projects we haven't found partners for yet. So that would go down when we get the partners money to buy 75%.

So we're, we're really excited about the capital efficiency of this business.

Stephen East -- Wells Fargo Securities -- Analyst

All right. That is hugely helpful. Thanks a lot.

Operator

And the next question comes from Susan Maklari of Credit Suisse.

Chris -- Credit Suisse -- Analyst

Hi, this is actually Chris on for Susan. Thanks for taking our questions. It looks like you're expecting a pretty significant ramp up in community count in the back half of the year. Is there any risk that some of those communities, pushed back in 2019 given the labor constraints we're seeing out there? And can you just give us a better sense of like the location and an overall profile of these communities?

Douglas C. Yearley Jr. -- Chief Executive Officer

Sure. I'll answer the second part of the communities are really spread around the country. We've got a whole bunch, 16 of the 75 in Pennsylvania but then we have an five in New Jersey. We have 10 in Nevada, a five in Southern California, eight in Boise but, again, those numbers I gave you probably add up to a third of the total.

So it's really widespread in, in most of our markets nationwide. With respect to labor and whether there's a risk of the community is getting pushed out, there's always the risk of some communities being pushed out. It's not because of labor. We certainly have the land development crews to get, in most cases, get the roads in, get the community ready to be opened.

If it's more about the permitting, the permitting process and almost all of our markets are complicated. It's tedious, it takes time. There can be 20, 30 permits associated with all a full land approval. And that final permit you need from the county soil conservation district to give you the green light to go which our team may believe is coming in June and it comes in July or August can lead to a community being pushed out but we're good at it.

We've hedged a bit in terms of the projections, we've given because we know historically that everyone we think may open will not. So I am comfortable with the guidance we've given and I think we're in good shape.

Chris -- Credit Suisse -- Analyst

Got it. Thanks for that. I think, could you just talk more about the regional differences you're seeing in California? Are there any specific areas that are driving the strength there and, how are you guys approaching, the pace of land acquisition in that state?

Douglas C. Yearley Jr. -- Chief Executive Officer

So we are in what I'll call the best locations of, Southern Cal LA and the best locations of Northern Cal San Francisco, both markets and the submarkets around those two cities are performing very well. Down South. I'd say Orange County is the best submarket and up North, we have more activity in the East Bay, then the South Bay but they are both very, very strong. With respect to land acquisition, we're active.

We've seen some very interesting and exciting deals in the last quarter. It's very competitive. Land is obviously very expensive in California. We put a lot of diligence and thought into everything we do out there but based on the deal flow that I am seeing, I think you'll continue to see strong results in good growth out West, out in California.

Chris -- Credit Suisse -- Analyst

Thanks. That's very helpful.

Operator

The next question comes from Michael Rehaut of J.P.Morgan.

Michael Rehaut -- J.P.Morgan -- Analyst

Thanks. Good morning everyone. The first question, just don't mean to beat a dead horse but I think it's the big focus on, the results today. Understanding the gross margins a little bit, Marty, you highlighted labor and materials as being one of the drivers a little bit to the downside here.

I think most other builders have also cited labor materials is a continued source of inflation but perhaps with an ability to at minimum offset those pressures, through price. Just one, it was curious given the solid pace that you've had and there's always a balance of pace versus price. If you feel that at this point that you're able to fully offset it? Obviously, you talked to most of your areas right now, continue to have very strong demand and you highlighted California not being impacted by rates or SALT. So just thoughts about your ability to offset labor materials going forward?

Martin P. Connor -- Chief Financial Officer

Well, Mike, I appreciate the focus of the question. And I think, we've said that we expect margin improvement in every product line and in every region in the third and in the fourth quarter. The most impactful of those regions in California because of its already high gross margins and it becoming a larger percent of a total business. So, every community stands on its own and we are able to achieve price increases in some that offset the cost increases.

In others, it's not able to be done but overall, we're looking at improved margins for the third quarter and the fourth quarter.

Robert I. Toll -- Executive Chairman

The pricing of our units is not based on cost, neither should it be for any other builder. We try and get as much as we can and we try and get that not tied to cost but tied to the demand that we feel in the market. So the offset feature of the increase in prices has really not there when you see these prices going up is because we have greater demand.

Michael Rehaut -- J.P.Morgan -- Analyst

I understand. I appreciate that. I mean, just kind of following on that in terms of pricing power, do you have a sense of the percent or rough percent of communities that you were able to raise prices this past quarter and, the rough amount, and how that might compare to the prior quarter?

Douglas C. Yearley Jr. -- Chief Executive Officer

I do not have that, Mike.

Michael Rehaut -- J.P.Morgan -- Analyst

OK. Just one last one. Coming back to a question on apartment, the apartment business and the growth there, and, Doug, you said that you could see that potentially doubling over the next few years. I was hoping to just get a kind of a brief recap of how you see that business from a returns standpoint relative to your core business.

I mean, we have another, one of your large competitors that's ventured into the apartment business as well and I think over time is looking at options along with some of its other ancillary businesses to refocus on the core home-building operation. It seems like you're looking to kind of build this -- further build this out over time and, could we see it getting to a bigger percentage of pre-tax income over the next three to five years?

Douglas C. Yearley Jr. -- Chief Executive Officer

Sure, Mike. With respect to returns from this business, the projects themselves are underwritten to upper teens, low 20s returns. And with our promote we add maybe 5 percentage points in our expectations to what we hope to achieve. With respect to the size of the business and its contribution to income, last year had contributed around $25 million to our pre-tax bottom line.

And this year we expect that to double. A lot of that is impacted by the pace and amount of gains on dispositions or sell-downs of our interests. And so, at this point, we have not fully baked what we expect for 2019 but we are intending to grow this business such that the sales of buildings get a little bit more routine than they are right now.

Martin P. Connor -- Chief Financial Officer

And, Mike, I will add that the multifamily team runs independently. It has its own land teams, it has its own construction teams, it has its own management and leasing teams. And I don't think at all are we distracted or not focused on the core business? We don't have land-acquisition managers that are bouncing between multifamily opportunities and for sale. Occasionally they may overlap because there may be a property that could be suitable for either.

And then we in here get to make that decision but, I'm very proud and happy with how the Apartment Living Group is running. And I'm very proud of how the homebuilding team is running. And I believe the longer term we can continue to build both businesses efficiently and effectively.

Michael Rehaut -- J.P.Morgan -- Analyst

Great. Thanks a lot.

Operator

And our next question comes from Megan McGrath of MKM Partners.

Megan McGrath -- MKM Partners -- Analyst

Thanks. Good morning, I wanted to circle back to order growth in the quarter. Obviously some mixed results from net perspective but can you talk us through where any region down here per year on an absorption paced growth perspective or was it all the declines due to community count declines?

Douglas C. Yearley Jr. -- Chief Executive Officer

Megan, the only reason an area maybe down would be because it's community count down. On a same-store basis on the number of sales per community for the quarter, the divisions were up.

Megan McGrath -- MKM Partners -- Analyst

Great. Thank you. And maybe a bit of a longer-term follow-up on California, given that it's contributing so much to your revenue and gross margin growth, if I think about, you talked about a little bit about the land, acquisition pipeline. If you look at your land holdings there now and your community count plans, will it represent as much or more in your view in the next, let's say 12 to 18 months and it is now or are we seeing some kind of sort of short-term peak in the California representation?

Douglas C. Yearley Jr. -- Chief Executive Officer

Hold on, let's get the numbers for you. Gregg? [Background chatter] Gregg is putting in front of me the numbers on community count throughout the year. We started fiscal '17 with 38 selling communities -- in fiscal '18. I have year-end year-end '17.

Well one day, one day later. So we ended fiscal '17 with 38 selling communities in California and we project the end of fiscal '18 with 39 plus one.

Megan McGrath -- MKM Partners -- Analyst

OK. And, and looking further out, I mean I guess my question really is, Doug, like how, are you comfortable with this level of contribution from California? Would you like it to get bigger? Is there a point at which you would be uncomfortable that it would be contributing so much to your revenue base?

Douglas C. Yearley Jr. -- Chief Executive Officer

So with respect to '19, we're not going to give specifics on community count or community location, except for my general comment when we started the call that right now we have owned and controlled land in place to grow community count in '19 and that, of course, is before we continue to see deal flow and we have deals in the pipeline that should add to that.

Martin P. Connor -- Chief Financial Officer

We have five different markets in California, Northern Cal in San Francisco and Sacramento, Southern Cal, San Diego and Los Angeles, right. And a little bit in Palm Springs.

Douglas C. Yearley Jr. -- Chief Executive Officer

Yes on Palm Springs in Sacramento are very, very small. Our business is driven by San Francisco LA and the northern side of San Diego. I'm comfortable with our size right now in California and based on the deal flow that I see the land that we're working on, I'm hopeful that we can sustain it at this level.

Megan McGrath -- MKM Partners -- Analyst

Great. Thank you.

Operator

And the next question comes from Nishu Sood of Deutsche Bank.

Timothy Daley -- Deutsche Bank -- Analyst

Hey, thanks. This is actually Tim Daley on for Nishu. So, the first question is on the lowered outlook for community count growth this year. It doesn't seem like early closeouts with the driver, volumes came in line with your expectations and it doesn't really seem like it was community delays as kind of the gross number of openings plan in the second half of the year actually went up.

So if you could just help us reconcile the moving pieces behind the revision, that'd be, that'd be super helpful?

Douglas C. Yearley Jr. -- Chief Executive Officer

Sure. A small part of it is sold out. We've had excellent sales and so a few more communities have sold out faster than we anticipated. So that is certainly part of it.

And the 75 communities that will be opening in the second half, some of that is because we thought they may open in Q2 and now they're being pushed to Q3.So it is a bit back-end-loaded not so much because we ran out and found new land but because the timing of the entitlements, as I mentioned earlier, is not always perfectly predictable. And if we lose a month or two or three, we can have a community get pushed out. So that's really what, what is driving it.

Timothy Daley -- Deutsche Bank -- Analyst

Appreciate the color there. So, I guess the second question then, if we're thinking about kind of the changes in the community counts trajectory and as well, it seems like there might've been some, a bit more intensity put on the closeouts of the standing inventory and the condo projects in New York. So if we're just thinking about kind of the operating cash flow expectations for the year, what kind of level are you guys anticipating? Obviously, '17 was very impressive. So just if you could help us, I guess to understand that?

Martin P. Connor -- Chief Financial Officer

Sure. So, and these are figures after land purchases and improvements and not reflecting any debt raises in excess of debt pay downs. So we think it's somewhere between a $250 million to $350 million.

Timothy Daley -- Deutsche Bank -- Analyst

Great. Thank you for the questions.

Operator

Next, we have a question from Steven Kim of Evercore ISI.

Trey Morrish -- Evercore ISI -- Analyst

Hey guys, it's actually Trey on for Steve. The first question is, touching on the New York City apartments, how much generally did you cut your margin expectations for those units that you're trying to push through? And do you expect to be through those by the end of this year or do you think they could linger a bit into '19?

Douglas C. Yearley Jr. -- Chief Executive Officer

So I think there is a potential for some of them to linger into next year because our appetite for margin reduction is not unlimited. So, we set expectations at the beginning of the year for margins in the mid to upper 20s. This quarter came in a bit below that but we're still comfortable with that amount for the full year.

Martin P. Connor -- Chief Financial Officer

And, and I will mention that we have a number of buildings that are under construction and actively selling where this is not the inventory issue, we've been talking about that are doing very well. At $2,000 a foot in New York City in the locations where we build the market is healthy. We're seeing very strong sales. We're also seeing very strong sales in Jersey City.

We talked about the building over a Provost Square now for the last year and that building will begin delivering in the fourth quarter. So the focus that we talked about on this call has been with the lingering remaining units in buildings that are completed and occupied, some of those units are small and there are a few of those units that are large and very expensive. And it's the larger, more expensive units that we have had to discount more because the upper end of the New York market is where there have been more issues. And we, for example, we moved one very expensive unit out in the second quarter and that unit required discounting to be sold.And thankfully we only have a couple of remaining large units in New York that we're hoping to work through over the next six months.

Trey Morrish -- Evercore ISI -- Analyst

OK, that's helpful. And then second, turning back a bit to labor, which you said it's an issue but you guys also have Toll Integrated Systems to help kind of offset some of those labor challenges, and I'm wondering if you could talk a bit about what you're doing at TIS to maximize the access of labor that you do have?

Douglas C. Yearley Jr. -- Chief Executive Officer

Yeah. So TIS is our panel and truss operation. We have four panel and truss plants that serve the Northeast, Mid-Atlantic, and Midwest. And it solves a lot of labor because when wall panels and roof trusses are built in our factories, you have framers on site for a week instead of 2 1/2 weeks because the obviously panels and trusses arrive and they just get erected.

And our labor force in those plants is solid, it's secure, it's been with us for many years and that has certainly helped us in those markets I mentioned because we have the plants.

Operator

Our next question will come from Jack Micenko of SIG.

Jack Micenko -- Susquehanna International Group -- Analyst

Good morning. The last couple of years it looks like G&A's levered couple hundred basis points between the 2Q into 4Q and this year the guidance is a lot less, obviously opening a lot of communities. Is that part conservatism? Is it all the community openings? I'm just trying to understand that. And then, the apartment personnel and teams you've added, I believe that flows to the JV line, so that's not a driver of, I'm just trying to figure out if, as a company, you're reaching terminal velocity on your G&A leverage or if there's, if there's more to go beyond the community openings in the back half?

Douglas C. Yearley Jr. -- Chief Executive Officer

So, on the G&A leverage I think, we reiterated our guidance, that is a 50-basis-point improvement from the year prior, and we think there's room in the future as well, but we're not going to get into that at this point, Jack.

Jack Micenko -- Susquehanna International Group -- Analyst

OK. And then, Marty, on the buyback, I guess you like it at 45, you'll love it at 40. How soft is that soft target of the $400 million and I guess at a higher-level question, is growth or ROE the bigger focus?

Martin P. Connor -- Chief Financial Officer

So it, it's tough to answer that equation without a focus on what's in the land pipeline, what's in the debt maturity pipeline, and what's in the M&A pipeline and what's in all the opportunities pipeline. So, I think, we gave you a soft target in our commentary and ironically the dollar price of the stock is not all that meaningful to the return on equity. If it helps the earnings per share a little bit but $100 million out of equity is $100 million of equity, whether you divide it by $45 or $40.

Jack Micenko -- Susquehanna International Group -- Analyst

OK, fair enough. Thank you.

Operator

And our next question comes from Jade Rahmani of KBW.

Ryan Thomas -- Keefe, Bruyette & Woods -- Analyst

Good morning and that is actually Ryan Thomas on for Jade. Just personally in terms of demand, are you seeing any noticeable impact and your buyer segments from either the rising rates are or declining affordability from the strong HP we've seen?

Douglas C. Yearley Jr. -- Chief Executive Officer

Yeah. In my prepared remarks when we started, I talked about rates. They have not impacted our business. I look at the second-quarter results, our sales teams around the country, have had nothing to say and have had no issues.

So, on the rate side, 4.87% rate, as I mentioned is still a low rate and is only 75 basis points up from a year ago. So right now we're very comfortable with our business and no issues out there. A home price appreciation, it has also not been a factor except we sell to move up homes generally, which means people looking to move up, have more value in their existing home, more equity and appear to be more interested to move up to our houses.

Ryan Thomas -- Keefe, Bruyette & Woods -- Analyst

OK, thanks for that color. And then just in terms of the impairments in the quarter, can you give us some more detail on what drove that? And did any of the any of that relate to the New York city condos you spoke about?

Douglas C. Yearley Jr. -- Chief Executive Officer

It did not. Go ahead, Mike.

Michael I. Snyder -- Chief Planning Officer

There was one community in Connecticut in particular that drove the majority of that impairment is approximately $12 million. It was a bit of return-focused, the change in strategy. We had slowly been working through this for a number of years but now we acknowledged that the right course of action is to accelerate sales and recoup our investment as soon as possible. So the proceeds can go elsewhere.

Ryan Thomas -- Keefe, Bruyette & Woods -- Analyst

Great. Thanks.

Operator

And next, we have a question from Jay McCanless of Wedbush Securities.

Jay McCanless -- Wedbush Securities -- Analyst

Good morning. Thanks for taking my questions. The first question I had on the entitlement, I mean, is it sounds like that's your biggest headwind when it comes to the reduction in the community growth guidance. Do you foresee this getting better as we move through the rest of the year? Or is it still the municipalities just don't have enough people to get the permitting done timely?

Douglas C. Yearley Jr. -- Chief Executive Officer

That hasn't changed much, so I don't think it's going to get worse. And I don't think it's going to necessarily get better. We build in a lot of tough places. The corner of main and main in the best towns and our markets are generally difficult places to build and there's a lot of permitting and we're good at it and we're in the middle of it.

It takes time. Most of the time we hit it right on but occasionally we have a little bit of slippage. It's not about how busy a municipality or county or a state is, it's just the complication of the permits. And so, we fight the fight every day.

As I said, we have hedged our number of [Inaudible] for this year because we have historic data and we know that every community that our teams tell us will open will not, but most will. And going forward based on the deal flow we have, the land we have secured, I'm very confident that we will continue to have community count grow.

Jay McCanless -- Wedbush Securities -- Analyst

Thanks. And then the second question, looking at the slowdown in the West from almost 40% order growth in the first quarter to negative 6% this quarter. And then the continued soft results in the Mid-Atlantic and the North segments. Was there any weather impact this quarter or was it all community-driven?

Douglas C. Yearley Jr. -- Chief Executive Officer

It was community count decline in the West. It was not weather-related.

Jay McCanless -- Wedbush Securities -- Analyst

In the North, in the Mid-Atlantic, it's similar?

Douglas C. Yearley Jr. -- Chief Executive Officer

That's correct.

Jay McCanless -- Wedbush Securities -- Analyst

Right. Thanks for taking my questions.

Operator

The next question will come from Matthew Bouley of Barclays.

Matthew Bouley -- Barclays -- Analyst

Hi, thanks for taking my questions. I just wanted to follow up on the, on the California gross margins and kind of the longer-term trajectory there. You're, you're calling for the sequential improvement this year. I think in the past you had called out an expectation for a year on year decline in California for the full year of 2018.

So the question is just kind of how are you thinking about the sustainability of those California gross margins, that that premium versus the rest of the business, beyond the next quarter or two? Thank you.

Martin P. Connor -- Chief Financial Officer

So, margins in California prior to this year were benefited by a rapidly appreciating environment. And some land purchases at a very early time in the cycle. We are at the low point right now of our margin in California compared to Q3 and Q4. And we've been encouraged by what we see out there as it relates to '18 fiscal year-end and the pricing power we have looking forward.

Matthew Bouley -- Barclays -- Analyst

OK. Understood. Thank you for that. And then also following up on the City Living gross margin side, kind of beyond the efforts you're making here on clearing inventory in New York, and also really thinking beyond the next two quarters, so if you could kind of comment on where you think at this point, what a more normalized gross margin, what will look like in the City Living business? Thank you.

Douglas C. Yearley Jr. -- Chief Executive Officer

We, we underwrite those buildings to a mid-30s gross margin, maybe a little higher over in Manhattan and a little lower on the Jersey side. And we have a building delivering in the fourth quarter and through the first three quarters of '19 that is hitting those in the Jersey City side and that will be pretty much the dominant piece of volume coming out in New York on balance sheet for next year.

Matthew Bouley -- Barclays -- Analyst

Got it. OK. Thank you very much.

Operator

The next question will come from Ken Zener of KeyBanc.

Kenneth Zener -- KeyBanc Capital Markets -- Analyst

Good morning all. Given where community counts are and obviously the back-half ramp, I'm wondering if you could talk to the impact on SG&A, specifically kind of I guess a fixed component of that? How that might look [Inaudible] obviously higher closings, better fixed-cost absorption, but could you kind of talk to that cadence just a little bit? Thank you.

Douglas C. Yearley Jr. -- Chief Executive Officer

Sure. So, the gross margin guidance for Q3 is better than Q2, despite an increase --

Kenneth Zener -- KeyBanc Capital Markets -- Analyst

For SG&A specifically.

Douglas C. Yearley Jr. -- Chief Executive Officer

I'm sorry?

Kenneth Zener -- KeyBanc Capital Markets -- Analyst

For SG&A, not the gross margins.

Douglas C. Yearley Jr. -- Chief Executive Officer

Sorry, excuse me. For SG&A, again, we expect revenue volume to create efficiencies despite a little more G&A associated with community count openings. So it should trend down in the third quarter and even more in the fourth quarter. We would continue to leverage G&A in future years below the 10% guidance that we set for this year.

Kenneth Zener -- KeyBanc Capital Markets -- Analyst

OK, good. And then I hear, I'm not asking you about gross margin guidance. I think you've been, you've explored that enough. I have interest in more than just the kind of the process because you guys have larger, longer starter home, longer build time.

How might you be controlling those costs for lumber, for example? I know some builders reprice those builds with the trade and distributors every 30 days. Is there a way to kind of think about how you, with your longer build time, might address those front-end costs changes differently than other builders? Thank you.

Douglas C. Yearley Jr. -- Chief Executive Officer

Traditionally with a bit of our volume going through from a lumber perspective, in particular, the TIS plan, we've been able to buy in bulk and get some benefit from that and also buy in advance to get some benefit.

Martin P. Connor -- Chief Financial Officer

The Northeast, Mid Atlantic, and Midwest that are benefited by the plants, all of our plants are on rail lines. We're able to bring in rail cars of lumber, so we can buy out maybe two, three, four months because we have a lumberyard warehousing operation where we're able to do that. In the other markets, I think we have, even though our homes may take a little bit longer to build, most of the added length is on the finished side, which is beyond lumber hitting the home. And I don't think, I don't think we have a different situation than the other builders.

We do our best to manage the lumber buying by ourselves or by our framers to buy out in advance as much as we possibly can. And if we can get out a month or two that that would certainly be our goal. And that's what we strive for.

Kenneth Zener -- KeyBanc Capital Markets -- Analyst

Thank you.

Operator

And our last question today will come from Alex Barron of Housing Research Center.

Alex Barron -- Housing Research Center -- Analyst

Yeah, thank you. Given the rising rate environment, whether you guys are thinking or actually shifting your price points or your size of homes or anything to make homes more affordable? That's my question No. 1. And my other question is if you can give us an update on how Vegas is doing for you?

Douglas C. Yearley Jr. -- Chief Executive Officer

Alex, with respect to the mix, we, as we've talked about, have, I think, the greatest variety and diversity of mix in the industry. So we're building the $2 million-plus houses in places like California and the $300,000 homes in Boise, and the $400,000 homes in Jacksonville, etc. So we have been shifting a bit to fill in the lower price point. And that has been naturally happening over the last couple of years.

That is not driven by mortgage rates. In fact, remember that our clients have much higher credit ratings, they put more money down, and it's generally easier for them to get a mortgage because they're not tapped out when rates go up a little bit. So the strategy for us to be more diversified is, I think, just a smart strategy based upon the growth of this company, the geographic diversity of the company, and the demographic trends of more millennials buying homes, but it's not being driven by the rate environment.

Martin P. Connor -- Chief Financial Officer

And we're seeing, 25% of our buyers this quarter pay all cash, and that compares to a historical average of around 20%, which has trended up pretty steadily over the last three quarters. And we only see approximately 15% to 16% of our buyers take an adjustable rate mortgage. If affordability was an issue that would go up instead of it having gone down around 5% in this most recent quarter.

Douglas C. Yearley Jr. -- Chief Executive Officer

And those that get a mortgage, the average LTV is 70%. So they're not maxing out their mortgage.

Robert I. Toll -- Executive Chairman

We have a very large component of our business in active adult housing. What is the average mortgage?

Douglas C. Yearley Jr. -- Chief Executive Officer

About half of those buyers pay cash and they are about 20% of our total. The second question concerned about how the Vegas market is doing -- the market feels pretty good. Our community count has declined in the most recent quarter.

Martin P. Connor -- Chief Financial Officer

Yeah, we started the year with 11 communities in Las Vegas. Right now we're at nine, and at year-end, we project to be at 10. But in terms of same-store, business in Vegas is still very good.

Alex Barron -- Housing Research Center -- Analyst

OK, great. Thanks so much.

Martin P. Connor -- Chief Financial Officer

You're welcome.

Operator

And this concludes our question-and-answer session. I would like to turn the conference back over to Douglas Yearley for any closing remarks.

Douglas C. Yearley Jr. -- Chief Executive Officer

Thank you, Laura. Thanks, everyone, for listening in and have a wonderful Memorial Day weekend and summer. Thank you.

Operator

[Operator signoff]

Duration: 67 minutes

Call Participants:

Douglas C. Yearley Jr. -- Chief Executive Officer

Martin P. Connor -- Chief Financial Officer

Robert I. Toll -- Executive Chairman

John Lovallo -- Bank of America Merrill Lynch -- Analyst

Dan Oppenheim -- UBS -- Analyst

Dennis McGill -- Zelman & Associates -- Analyst

Stephen East -- Wells Fargo Securities -- Analyst

Chris -- Credit Suisse -- Analyst

Michael Rehaut -- J.P.Morgan -- Analyst

Megan McGrath -- MKM Partners -- Analyst

Timothy Daley -- Deutsche Bank -- Analyst

Trey Morrish -- Evercore ISI -- Analyst

Jack Micenko -- Susquehanna International Group -- Analyst

Ryan Thomas -- Keefe, Bruyette & Woods -- Analyst

Michael I. Snyder -- Chief Planning Officer

Jay McCanless -- Wedbush Securities -- Analyst

Matthew Bouley -- Barclays -- Analyst

Kenneth Zener -- KeyBanc Capital Markets -- Analyst

Alex Barron -- Housing Research Center -- Analyst

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